Questions and Answers About Deferral of the Social Security Payroll Tax

On August 8, 2020 President Trump issued a Presidential Memorandum directing the U.S. Treasury to allow withholding of the employee’s 6.2% portion of the Social Security payroll tax to be deferred between September 1, 2020 and December 31, 2020. The deferral is restricted to “any employee the amount of whose wages or compensation, as applicable, payable during any bi-weekly pay period generally is less than $4,000, calculated on a pre-tax basis, or the equivalent amount concerning other pay periods.”

This deferral only applies to the employee’s 6.2% portion of the payroll tax. The 1.45% Medicare tax is not affected and must still be withheld. (The employer’s Social Security portion of the payroll tax was already deferrable under the CARES Act.)

To be clear, this is a deferral of the tax; it must be repaid unless Congress acts to forgive it.

It is the repayment obligation that is problematic, particularly since the long-awaited IRS guidance (IRS Notice 2020-65 issued August 28, 2020) does not clarify some important issues:

  • Private-sector employers can choose to opt in or out of this program. However, there is no guidance about whether individual employees have that option. So, can employees opt out of deferring the tax even if their employers opt into the program?
  • There is no guidance for how to manage withdrawals for employees who earn commission or overtime. For them, the $4,000 threshold, which is not flexible, may be met only for random pay periods. That can make recordkeeping very difficult.
  • Employers—not employees—are responsible for collecting and repaying the deferred taxes, which must be collected between January 1, 2021 and April 30, 2021. This effectively means that employees who are repaying the deferred amounts will be paying the Social Security portion of the payroll tax at a rate of 12.4%. Their paychecks will be bigger for the remainder of 2020 but smaller in the first four months of 2021. In addition, any amounts not collected by April 30th will start accruing interest, penalties and “additional taxes” on May 1, 2021.
  • Since it is the employer who is responsible for repaying the deferred taxes to the government, what happens if the employee voluntarily or involuntarily leaves the company before the end of 2020? Can the deferred taxes be collected from the former employee or will the employer be responsible for paying the bill?
  • Payroll systems will need to be adjusted to reflect the payroll tax decrease this year as well as for the payroll tax increase in 2021. This may be a burdensome undertaking, particularly for employers who administer their own payroll.
  • Note that it is still unclear whether federal employees will be required to take the payroll tax deferral, although it seems that they will.

The rules governing the payroll tax deferral can be complex. Please contact our tax professionals at (973) 298-8500 if you have any questions or would like us to review your situation before you make any decisions.